One of the most important levers of a sound outsourcing contract — which ensures an organization receives its promised services — is service levels. These are the service provider’s commitments to achieve performance metrics agreed to in the contract.
There are several considerations for negotiating service level commitments during two stages: the preparation of a request for proposal (RFP) for outsourcing services and the contract negotiations with one or more service providers.
Request for proposal
Before issuing an RFP for outsourcing services, take the time to document the service levels that are currently being achieved internally or, if your organization is outsourcing the services to a legacy service provider, the service levels that are being achieved by the legacy service provider.
By taking this time, an organization sets itself up for a more productive exercise in defining what else it needs and ensuring any new service levels align with its objectives and requirements. The service levels in the RFP should not just be aspirational, they should be realistic.
Often, a responding service provider will say the proposed service levels will impact pricing. To maximize transparency in the service provider’s responses, consider requesting pricing based on a number of different service level scenarios, with everything else being equal, so there is better visibility into the savings or incremental costs associated with these differences.
Another important aspect of service levels that is important to set out in the RFP documentation is termination rights related to service level failures. Consider whether there are any service levels that are so key to the organization that if there are one or more failures, you can terminate the relationship.
Outsourcing relationships are usually lengthy and with any long-term commercial relationship, it is prudent to ensure the employer has an exit strategy. If you are going to ask for certain termination rights for service level failures, these rights — or the occurrence of events giving rise to such rights — should be objective (to the extent possible) and determinable.
Avoid prescribing a complex or convoluted series of criteria that must be met before you have the right to terminate the service. These termination triggers should be factored into the service provider’s pricing proposal.
Even if an organization chooses not to go through an RFP process, many of the items discussed previously are also applicable to negotiating an outsourcing agreement with one or more service providers.
In addition, consider whether any of the following types of provisions should be part of the discussion:
• Service levels that were achieved by your organization or another service provider prior to outsourcing the services but, for one reason or another, are not documented in the applicable service agreement.
• Escalation, root cause analysis and resolution times for service level failures.
• Reporting of service levels in a manner that is easy to understand and follow so the organization can track and manage them internally.
• In some narrow cases, providing incentives, such as bonuses or earnbacks, where a service provider performs above the expected levels of service and truly adds incremental value to your organization (such as better customer experience or more revenues or profits).
As technologies advance and as the outsourcing industry evolves, the way organizations approach service levels will undoubtedly undergo changes. However, for the foreseeable future, it serves an employer well to keep the following principles in mind when negotiating service levels:
• Service levels should capture measurable portions of the services that are being outsourced (meaning the applicable services can be accurately tracked and reported on by the service provider).
• Service levels should provide an organization with assurance the service provider will be able to perform the services in a manner that’s as good as or better than your organization (or the legacy service provider) is able to perform in-house.
Wouldn’t it be great if we could apply these strategies and contract for service levels with our cable and utility companies or, better yet, doctors and dentists?
Ted Liu is an associate at Osler, Hoskin& Harcourt who can be reached at (416) 862-6459 or firstname.lastname@example.org. Joel Ramsey is a partner at law firm Osler, Hoskin& Harcourt in Toronto who can be reached at (416) 862-6738 or email@example.com.